Debt row: What happens when you can never pay it off

One day, Michael Edwards took all of his credit cards and counted them. It was jarring to flick through them like a deck of cards; he had more than 20. By using the plastic and a line of credit, his family had racked up $85,000 in consumer debt.

“The temptation was to defer the balance to another credit card for smaller interest and worry about it later,” said the 48-year-old Windsor, Ont.-area father of three. He asked that his last name be changed. “With the normal routine of your life, with work and kids, it was out of sight, out of mind for that month. It was a combination of a lot of little acts. It was a slow progression.”

If you alternate bills, you can sometimes keep your creditors at bay for a period of time. But this won’t last. Read more.

This progression took about 20 years, the vehicle salesman said — 20 years of varying levels of debt, of buying items for the house, for their children and making the minimum payments.

How long can someone live on credit?

“You could live on debt for most of your entire life,” says Jeff Schwartz of Consolidated Credit Counseling Services of Canada. “The question becomes if you do have debt, how are you managing it and is it good debt or bad debt?”

The average Canadian consumer debt (excluding mortgage), according to TransUnion’s latest quarterly report, is $26,935.

We have a lot of credit options — credit cards, leasing companies, private lenders — and we can shuffle our debts around by transferring loans to new credit suppliers to avoid late fees. We also can borrow more with historically low interest rates. Almost half of Canadians who have credit card debt say they always or often carry an outstanding balance, according to a survey by Harris/Decima for Hoyes, Michalos & Associates. One in four say it will take more than a year to pay off their outstanding balance; 1 in 20 report that they will never be able to fully pay off the debt.

And certainly you can die in debt. Sixty-seven percent of Canadian adults don’t understand what will happen to their debt when they die, according to a recent survey from the Lawyers’ Professional Indemnity Company. When asked about their greatest worry about leaving behind debt after death, one respondent said: “Dead people don’t worry.”

Well, with you dead, creditors turn not to your family but to your estate, which can go bankrupt. But no one is advocating a fiscal policy involving cashing in on credit just as you are checking out.

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“That’s the silliest thing I’ve ever heard in my life,” Mr. Trahair says. “When are you going to die and what if you live until 90? What if interest rates go up? How would they maintain [a lifestyle]? If they time it wrong, they could end up going bankrupt.”

Some things, you cannot plan for and eventually, experts say, the debt will catch up to you.

“You’re on debt row. You’re already inevitably dead at some point,” says Ed Portelli, president of OCCA Consumer Debt Relief. “If you’re in debt, it means that you don’t have a positive flow of income…You borrow $1,000 and you pay it back. Next month, you borrow $1,000 and pay it back. There’s going to be a month where you can’t pay it back.”

Are you on debt row? Here’s how to know: Are you only making the minimum payments? Are your credit cards maxed out? Are you dipping into your savings or retirement fund to pay bills? Are you spending more than 15% of your net income toward servicing your credit card debt?

“With some retail credit cards, you’re talking about a 120-year repayment term. For a regular credit card, you’re talking 30 to 50 years,” Mr. Portelli says. “This is for an object that you bought when you were 30 and the plan is to pay it off by the time you are 60. That’s if you don’t use the card again. As you pay down the minimal amount, you start to refill it up again.”

If you’re only making the minimum payments on your cards, you’re going to end up spending loads of money on financing charges. For example, if you put a new $1,000 plasma television on your credit card which has an 18% interest rate and you only make the minimum payment of 2% or $10 (whichever is greater), it would take you almost 20 years to pay it off. You would have spent $1,931.11 in interest payments on top of the television.

If you are using 50% of your maximum credit, it’s going to start having a negative effect on your credit score, Mr. Schwartz says. “If you’re deemed to be more risky than someone else, they’re either going to raise your interest rate or decline you altogether. It can come into effect if someone is looking at you for a particular job or to rent you an apartment.”

If you can’t pay, creditors can take you to court, which may allow creditors to garnish your wages or place liens on your property.

Based on the Consumer Protection Act, a creditor must believe that there is a reasonable probability that you will be able to repay a loan before they approve it, Mr. Portelli says.

Creditors, he argues, hold some of the blame for encouraging people to borrow beyond their means. “When you fill up your line of credit, you have no potential to pay it down and then they give you more,” he says. “They’re trying to get a bigger market share of debt out there; they want to get people as much as possible in their hands.”

Credit card companies or banks can pull your credit or close your account if they consult your credit report and are concerned.

But Mr. Portelli says in his experience, creditors will increase interest rates or reduce credit limits rather than close accounts.

“If my credit rating starts to suck and I start to call people for help, will they remove a credit product? No. Not unless you’re defaulting,” he says.

The bank increased Mr. Edwards’ line of credit by $2,000 around Christmas time every year.

But his debts caught up to him in 2009 after the financial crash caused sales to dry up and his income was reduced. “I wrote all of my credit card companies and said, ‘Hey, it looks like I’m going to be challenged in the near future. Only one of them responded.’”

He sought help from OCCA Consumer Debt Relief, re-mortgaged the house and now has only one credit card with a limit of $300. “It’s amazing how the human psyche can adjust to what it has access to. We’ve been just fine. When we put our kids in hockey or soccer, we draw it from our checking account because we’ve saved up.”

He is still repaying his creditors.

“Learning to live with less is okay,” he says. “I know to stay the course and move on. They don’t define who you are today — the mistakes or bad choices that you make.”